Predicting Success When Investing in Startups

June 2017

AI to Help Both Investors and Creators

The allure of taking a creative idea and starting a successful business has taken on new meaning with VC firms eager to find the next Unicorn. Yet, as noted at the start of this series, venture capitalists have become more cautious about investing in startups. As a result, the use of AI to predict the likelihood of success for new businesses is gaining attention as way to reduce investment risks, although at a slower pace than robo investing. Springwise has been tracking this development and identified Test4StartUp as a company whose mission to assist startups in their formative stages would benefit both founders and potential investors of new companies. We follow up Springwise’s discovery with additional research from Factiva and VentureSource to further understand the topical landscape.

Innovator

Company to Watch: T4S

Test4StartUp is a software company focused on assisting startups with research and recommendations on areas such as product pricing to help new companies have the greatest chance for success.
Test4StartUp uses a keyword-based analysis to aggregate information on specific industries or markets and creates infographics on competitors, trends and pricing variation. Test4StartUp has
flown under the radar so far as there has been little media exposure, but has already been identified by Springwise as an innovator. 19

Springwise Innovation Snapshot Report

What Else Did We Find?

While Test4StartUp uniquely focused on the needs of the startups, much of the market has been looking more from the interests of potential investors. One such entity is Chinese company InnoTree. Founder Ma
Chao explained that robots are used to create a database that covers the investment and financing information of more than 130,000 startups, and then tracks and analyzes the daily operation situation of these
startups or their projects. Ma said the robots analyze the business model of each project, then selects the startups that are worth investment based on its modeling and calculation. 20

Leveraging AI to Improve a Successful Investment

There are at least three ways in which investors can use AI-based algorithms to improve their bets on a startup:

Identify and assess the startups to fund.

Help make strategic decisions for the startup.

Identify acquisition opportunities for the startup.

Differentiating Through Unique Algorithms

Providing a unique perspective on methods for predicting the survivability of startups is Ironstone, a firm established by William Hambrecht, who started a technology-focused investment bank in 1968 and helped
many of the largest tech companies go public. Ironstone developed algorithms that challenges the thinking of traditional venture capitalists. One of Ironstone’s conclusions is that a start-up’s founding team has
only 12 percent predictive value, which runs counter to a factor most investors deem as critical. Ironstone also focuses primarily on the market a company is entering rather than the startup itself, because they
expect startups are likely to change course, while the market has more predictive power. 21

Companies Want to Vet Startups, Too

A company that entered the startup prediction field a few years ago is Growth Science, which created a predictive algorithm that tries to determine whether or not startups will fail. Growth Science uses
data science based on disruption theory to look at three key areas: 22

The likelihood of the business surviving or failing.

Its growth expectations.

What changes can be made, in the case of failure, to increase the odds of success.

It can be intimidating to startups to know a company like Growth Science is capable of calculating their odds of success before ever launching a product into the market. The business, according to founder
Thomas Thurston, “is basically a prediction factory”. 23

"Usually entrepreneurs are worried their flash of genius can’t be captured, and the investors are very afraid that this will somehow diminish their value. If an algorithm can do better at picking than me, will that put me out of a job?" 24

Growth Science’s Thomas Thurston

China Daily, 13 April 2016

Springwise

China Daily, 13 April 2016

The New York Times, 24 June 2013

The New York Times, 24 June 2013

The New York Times, 24 June 2013

The New York Times, 24 June 2013

Also in this series

A New Dawn of Artificial Intelligence

Financial Planning Software

Predicting Success When Investing In Startups

Predictive Modeling To Prevent Epidemics

The Future Of AI: Will Artificial Intelligence Software Help or Hurt Society?